The party’s over A special report on Spain November 11th 2008

sspain.inddpain.indd 1 228/10/088/10/08 14:09:5414:09:54 The Economist November 8th 2008 A special report on Spain 1

The morning after Also in this section Zapatero’s gambits Flirting with nationalists, provoking the opposition. Page 3

How much is enough? Devolution has been good for Spain, but it may have gone too far. Page 5

Banks, bricks and mortar An already solid †nancial system faces more consolidation. Page 7

In search of a new economy But reforming the old one is just as impor• tant. Page 9

A cooler welcome Attitudes to immigration are turning more cautious. Page 11 After three decades of partying, Spain has woken up with a hangover. The Spanish legion Curing it will require changes, writes Michael Reid Modern Spain has bred a remarkable range of HE past few months have been bitter• economy grew by just 0.1% between the successful companies. Page 12 Tsweet for Spain. In a general election in †rst and the second quarters of this year, March the Socialist Party won a clear but the slowest pace since 1993. It is now al• The perils of parochialism not overwhelming victory, giving José Luis most certainly contracting. So sharp was Europe is no longer an automatic solution for Rodríguez Zapatero a second term as the deterioration that Mr Zapatero (pic• Spain’s ills. But nor is navel•gazing. Page 14 prime minister. That seemed to drain some tured above with Pedro Solbes, his †nance of the partisan poison that had accumulat• minister), who had earlier refused to ac• ed in the political system over the previous knowledge that there was any economic four years. In June Spain shook o its long• crisis, interrupted his August break to hold standing reputation as the permanent un• an emergency cabinet meeting. ŒSpaniards der•achiever of world football, winning went on holiday in party mood and came the European championship with swift back to †nd there was no champagne left, and skilful attacking play. Not only did the nor even any decent wine, sums up Fer• performance of its young team (featuring nando Fernández, a former IMF oˆcial Catalans as well as the usual Madrileños who is now rector of Nebrija University in prominent positions) seem to echo near Madrid. Spain’s ‡owering of creativity in every• Acknowledgments thing from architecture to gastronomy; Great while it lasted Apart from those mentioned in the text, the author would many commentators saw the footballers’ The †esta had indeed been splendid. Spain like to thank the many other people who helped in various ways with the research for this special report. He is triumph and the public’s rapturous re• has undergone an extraordinary transfor• particularly grateful to Eduardo Serra Rexach, Bernadino sponse to it as a welcome expression of na• mation since Francisco Franco died in 1975 León, Ana Patrícia Botín, Maite Rico, Luis Prados de la tional unity in a country that seemed to be and his long dictatorship came to an end. Escosura, Pedro Ruíz Morcillo, Tom Burns Marañon, Lord (Tristan) Garel•Jones, Martin Leeburn, Juan Cierco and turning increasingly †ssiparous. In July Ra• Democracy was swiftly consolidated. A Fernando Villalba. fael Nadal, a tennis genius from Mallorca, deeply conservative Catholic society has won the Wimbledon championship. At metamorphosed into an almost self•con• For our interview with the prime minister, José Luis the moment of victory he scampered sciously tolerant one. In the 1960s two• Rodríguez Zapatero, see across the press•box roof, clutching the na• †fths of Spaniards still toiled on the land, www.economist.com/zapatero tional ‡ag, to salute Spain’s crown prince many of them living in poverty. Now only and his wife. 5% work in agriculture. Spain has become a A list of sources is at But every month since the election the vibrant, middle•class urban society. www.economist.com/specialreports news at home has become gloomier. In• Social and political change went hand vestment is slumping. Unemployment in in hand with economic progress. Between An audio interview with the author is at August was 11.3%, a third higher than a year 1994 and 2007 the economy grew at an av• www.economist.com/audiovideo earlier, the biggest jump for 30 years. The erage annual rate of 3.6%. During that per• 1 2 A special report on Spain The Economist November 8th 2008

2 iod unemployment fell from 24% to 8%, leashing a housing boom. sion struck in the past, as it did in the early even though many women joined the la• Yet with a suddenness that has taken of• 1980s and again in 1993, the key to recovery bour force and some 5m immigrants ar• †cials by surprise, economic boom has was devaluation. But with Spain in the rived‹and were absorbed with scarcely turned to bust. When the European Cen• euro that option is no longer available. Un• any sign of tension. For most of the past de• tral Bank raised interest rates last year, the less the government rams through struc• cade Spain has been responsible for creat• housing bubble burst. Higher oil prices tural reforms to make the economy more ing about one in every three new jobs in also cut disposable income, as well as competitive, the argument goes, adjust• the euro zone. By 2007 total employment pushing in‡ation to a new high of 5.3% in ment to a harsher economic environment had risen to 20m, from only 12m in 1993. July. And international †nancial turmoil will involve a big rise in unemployment When Spain joined the forerunner of the has caused a credit squeeze at home. and years of stagnation. Instead of going European Union in 1986 its income per per• Mr Zapatero points out that so far Spain into a V•shaped recession, with a swift re• son was only 68% of the club’s average; in has fared no worse than several other large covery, the economy could be heading for 2007 its income per person was 90% of European economies, and that the coun• an L•shaped depression. that of the 15 EU members before its latest try’s †nancial system is stronger than that Spain’s prosperity is due partly to good expansion. Living standards are now high• of many of its counterparts: to date, no luck, in the form of EU entry. But for most er than Italy’s. Spanish bank has got into diˆculties. In an of the past 30 years it has also managed its The improvement in Spaniards’ lives is interview for this special report Mr Zapa• a airs far better than its southern Mediter• instantly visible. Many elderly people are tero conceded that the economy faces a ranean peers have done. Despite some cor• short, stunted by the hunger they su ered period of stagnation, but insisted that ruption, particularly in local government, as children in the hard years of fascist au• Spanish politics is generally fairly clean. tarky after Franco won the civil war of The country’s economy is relatively open 1936•39. Young Spaniards are strikingly Narrowing lead 1 and ‡exible‹halfway between Britain and taller than their grandparents, exempli†ed GDP, % increase on previous year the rest of continental Europe. Economic by Pau Gasol, who measures seven feet management has been mostly competent (2.13 metres) and was voted the most valu• 5 and stable: since 1993 Spain has had just able player when Spain won the latest Spain two †nance ministers (Italy has had four world basketball championship. 4 since 2001alone). Mr Solbes, who has held Spain is not just a desirable place to the job since 2004, had an earlier spell in 3 live‹though it is that, attracting northern 1993•96 under Mr González before moving Europeans who have bought second 2 on to become the EU’s commissioner for homes in order to enjoy the Spanish com• EU15 economic and monetary a airs. Under Mr bination of sun, good public services and a 1 Aznar the incumbent was Rodrigo Rato, relaxed way of life. In 2006 it was the who subsequently became the IMF’s boss. world’s ninth•largest economy measured 0 Oˆcials reel o other reasons why at market exchange rates and the twelfth• 1996 98 2000 02 04 06 08* Spain is now a di erent and stronger coun• Source: Eurostat *Forecast largest at purchasing•power parity. It is the try than it was when recession last struck. sixth•biggest net investor abroad. For example, in 1993 the government had a The economic boom began under Fran• Œonce calm returns to the international sys• budget de†cit of 7% of GDP; in 2007 it had a co, who abandoned autarky in the late tem, we will return to growth without the surplus of 2.2% and public debt was just 1950s. He turned the management of the Spanish economy having su ered struc• 36.2% of GDP, down from a peak of 68% in economy over to technocrats from Opus tural damage. The government forecasts 1996 (compared with Italy’s †gure of 104% Dei, a lay Catholic organisation, who that after a year of almost no growth a re• in 2007 or Britain’s of 44%). Even more im• opened it to foreign trade and investment. covery will start towards the end of 2009. portantly, over the past 15 years a clutch of But a bigger change came in 1986 when Fel• This strikes many as far too optimistic. powerful Spanish multinationals has ipe González, a Socialist prime minister, Economists and businesspeople complain emerged. In 2000 the Financial Times list led Spain into Europe. Foreign direct in• that the government was slow to respond of the world’s 500 biggest †rms by market vestment ‡ooded in as multinationals set to the economy’s swift descent into reces• capitalisation included only eight from up car and other factories to take advan• sion. One of the country’s most experi• Spain; by 2008 the †gure had risen to 14. tage of relatively low wages. enced bankers reckons that even if the out• A generation of young Spaniards that side world rights itself fairly quickly, has grown up knowing nothing but rapid The euro e ect recovery will not begin for at least two economic growth may now have to con• Money from Brussels also poured in. Spain years. Some are even more pessimistic, ar• tend with unemployment. This will put has been the largest single bene†ciary of guing that in addition to the liquidity Spain’s political system, as well as its econ• EU regional funds. It has received a total of squeeze and the housing bust Spain su ers omy, to its most severe test since the early ¤186 billion, most of which was wisely from an underlying lack of competitive• years of its transition to democracy. This spent on improving roads and railways. ness. The symptoms are a current•account special report will weigh the country’s Under Mr González’s successor, José María de†cit that topped 10% of GDP in the †rst strengths and weaknesses and assess its Aznar of the conservative People’s Party half of this year and an in‡ation rate that prospects for renewed economic growth. It (PP), Spain quali†ed to join the euro at its has been about one percentage point high• will argue that Spain can avoid Italy’s fate inception in 1999. Interest rates fell dramat• er than the average for the euro zone for of seemingly remorseless decline. But ically: the cost of mortgages, for example, most of the past decade. there are some grounds for concern in poli• came down from 18% to below 5%, un• Fixing this will not be easy. When reces• tics, the subject of the next article. 7 The Economist November 8th 2008 A special report on Spain 3

Zapatero’s gambits

Flirting with nationalists, provoking the opposition

IR JOHN ELLIOTT, a British historian nar allied with CiU and kept many of the were Islamist extremists, many Spaniards Sand the foremost authority on Spain’s Socialists’ policies, adding tax and labour were outraged at this deceit‹and con• imperial apogee in the 16th and 17th centu• reforms. He also took a †rm line against the †rmed in their view that the Iraq venture ries, delivered a paper at Santander’s Me• terrorists of ETA (Euskadi Ta Askatasuna, had made the country vulnerable. A huge néndez Pelayo University this summer in or Basque country and Liberty), who had turnout of voters gave the Socialists under which he ventured that Œthe period be• nearly killed him in a bomb attack in 1995. their new leader, Mr Zapatero, a narrow tween 1975 and 2000 may come to be seen Things began to change in Mr Aznar’s and wholly unexpected victory. in retrospect as a golden age of Spanish his• second term when he had won an abso• Mr Zapatero represented a new genera• tory. He went on to say that the past eight lute majority and became increasingly tion whose political lives had not been years Œhave seen the falling of shadows high•handed. He secured a ban on parties shaped by dictatorship. Aged 43 when he over what for a quarter of a century had that sympathised with ETA and treated the became prime minister, he had been a seemed to be an increasingly sunny land• conservative Catalan and Basque nation• schoolboy in León, in northern Castile, scape. The shadows include polarisation, alists with cold hostility. He backed Presi• when Franco died. He had worked his way the re•emergence of dogmatism and Œnar• dent George Bush’s war in Iraq with up the local party machine before narrow• row•minded nationalism and localism. troops, even though polls showed that ly winning the leadership of the Socialist When Franco died, politicians across 90% of Spaniards opposed this. In a crown• Party against its grandees at a congress in the political spectrum were determined to ing moment of hubris he held his daugh• 2000. Often derided as a lightweight, he seek deals that would avoid the mistakes ter’s wedding at El Escorial, the monastery• has bene†ted from being underestimated of the past. They blamed political maxi• palace of Spanish monarchs in the golden by his opponents. The PP found it hard to malism from both right and left for plung• age to which Sir John Elliott harked back. accept its 2004 defeat and not to see him as ing the country into the bloodletting of the an accidental prime minister or even a civil war and its aftermath of repression in Bombshell election usurper. But Mr Zapatero has shown him• which about 600,000 people died. The To his credit, Mr Aznar stuck to his promise self to be a skilled political tactician with a constitution promulgated in December to step down after two terms. As his suc• ruthless appreciation of power that has 1978 was preceded by a broad amnesty and cessor he chose Mariano Rajoy, a decent given him an iron grip over his own party. contained some historic compromises. but plodding politician who seemed un• In oˆce he has kept his predecessors’ The left accepted a parliamentary monar• likely to overshadow him, rather than Mr macroeconomic policies, but in other chy instead of seeking to restore the Sec• Rato, his brilliant †nance minister. Even so, ways pursued a di erent agenda. He began ond Republic snu ed out by Franco. The the PP seemed set to win the 2004 election. by ful†lling his campaign promise to with• right agreed to devolution for the Basque But three days before the vote ten bombs draw the troops from Iraq, which earned country, Catalonia and Galicia, which it exploded simultaneously on several Ma• him the enmity of Mr Bush. At home he had opposed (and annulled) in the 1930s. drid commuter trains, killing 191 people stressed what he calls Œthe expansion of A short•lived centrist grouping called and injuring more than 2,000 in the coun• freedoms. His cabinets, in which Mr the UCD governed during the transition try’s worst•ever terrorist attack. Mr Aznar Solbes is one of the few survivors from Mr and in 1981 survived the only serious coup tried to pin the blame on ETA. When it González’s day, have contained many attempt by diehard franquistas. Mr Gonzá• quickly became clear that the perpetrators women‹a demonstration of his commit•1 lez, who was in oˆce from 1982 to 1996, es• tablished a modern welfare state and be• gan to shut down or privatise Franco’s rusting state•owned steel works, shipyards and mining industries. In its †nal years Mr González’s government was beset by cor• ruption scandals. In a politically charged atmosphere dubbed crispación (roughly, Œexasperated irritation), he turned to the conservative Catalan nationalists of Con• vergència i Unió (CiU) for support. The victory of Mr Aznar’s People’s Party (PP), which brought together former franquistas, liberals and much of the UCD, was an important milestone for the new democracy. It seemed to show that the right had embraced modern democratic conservatism. Lacking a majority, Mr Az• Goya’s view of the politics of crispación 4 A special report on Spain The Economist November 8th 2008

2 ment to equality of the sexes. Other re• †cials say that Mr Otegi proved to have no forms allowed for quick divorces and sway over ETA’s leaders. The government same•sex marriage, encouraged stem•cell did allow a party of the Œpatriotic left (the research, penalised domestic violence and Orwellian term that ETA’s political sympa• promised public money for the care of el• thisers use to describe themselves) to take derly or disabled people. All these mea• part in municipal elections in 2007, and it sures Œstrengthen the idea of citizenship got 7.4% of the vote in the three Basque and make for a Œmore creative, more toler• provinces. But by then ETA had broken the ant society, says Mr Zapatero. truce: without any warning, a car bomb at Most Spaniards agree with him. But the Madrid’s Barajas airport killed two Ecua• measures provoked the conservative bish• dorean immigrants in December 2006. ops who head the Catholic church into Both Mr González and Mr Aznar had protests against the government. Mr Rajoy, sought a negotiated peace with ETA, only smarting from his election defeat, was hap• Rajoy, twice a loser to be similarly frustrated. But they had py to support them. Mr Zapatero thus done so with the opposition’s consent. manoeuvred the PP into portraying itself the right to honour and rebury their dead. This time the PP angrily accused Mr Zapa• as more reactionary than the average But some charge him with trying to politi• tero of breaking an anti•terrorist pact be• Spaniard‹and perhaps than it really is. cise the issue. Many historians deny that tween the two parties. As for ETA, oˆcials He took three more controversial steps the transition to democracy involved a say its violence is now rejected by many of which his detractors (and not just on the Œpact of silence. Juan Pablo Fusi, of the Or• its traditional supporters. ŒThat suggests right) see as undermining the tacit under• tega Institute, a postgraduate school, that one day it will end, and we are closer standings behind the constitutional settle• points out that the past 30 years have seen to the end than †ve years ago, says Alfon• ment. The †rst was to challenge the Œpact a deluge of detailed research, conferences, so Pérez Rubalcaba, the interior minister. of silence, as some on the left call it, and debates and television programmes on ev• It is Mr Zapatero’s entanglements with reopen debate about the dictatorship. A ery aspect of the war and the repression. the legal nationalists of Catalonia (see law approved in 2007 o ers government Many feel uncomfortable with the idea map in next article), rather than with ETA, help and money for the relatives of those that the state is upholding a particular that will have a lasting e ect. A few years killed by the Franco regime, often dumped view of the war which ascribes all fault to ago some Socialists feared that Mr Aznar’s in unmarked graves, to †nd and rebury Franco’s nationalists and none to the com• PP had secured a long lease on power their dead. It also calls for all plaques com• munists and anarchists who also commit• through economic success and alliance memorating the old regime to be removed ted atrocities and undermined the repub• with CiU. The Socialists responded by from public buildings. Its supporters say lic. Fernando Savater, a philosopher who moving closer to the nationalists. The So• that the law re‡ects the increasing maturi• was jailed under the dictatorship for his cialist leader in Catalonia, Pasqual Mara• ty and self•con†dence of Spanish democ• political activity, notes acidly that the law gall, allied with Esquerra Republicana racy. It righted a clear wrong. The 60,000 or is trying Œto win the civil war now and (ERC), a pro•independence party previous• so civilians murdered by Republicans had that Œtoday Franco has many more oppo• ly shunned because it rejects the Spanish long since been honoured. Some 150,000 nents than when he was alive. constitution. This allowed the Socialists to executed by the victors during or after the take power in the region in 2003. war had not. Unruly fringes In oˆce, the Catalan Socialist Party has In the mid•1970s the priority for most Even more controversial was Mr Zapa• shown itself to be as nationalist as the na•1 Spaniards was to turn their back on dicta• tero’s attempt to seek peace with ETA. The torship rather than to seek truth, justice or group has killed more than 800 people reconciliation. The attempt in 1998 by Bal• since 1968, but it has been greatly reduced, The big two, and the rest 2 tazar Garzón, a maverick magistrate, to in numbers and in potency, by e ective po• Elections to the Congress of Deputies, % of vote seek to extradite Chile’s dictator, Augusto lice work. Co•operation with France has 2008 2004 denied its leaders their traditional refuge Pinochet, for crimes against humanity 0 10 20 30 40 50 proved the catalyst for a shift in attitudes. over the border. The March 2004 bomb• 169 Mr Garzón’s initiative laid Spain open to ings caused widespread public outrage at PSOE 164 the charge of hypocrisy, since none of terrorism. Two years later ETA declared a PP 154 Franco’s oˆcials had been held to account. Œpermanent cease†re. Talks took place be• 148 It also prompted a new generation‹the tween Patxi López, the Socialist leader in United Left 2 grandchildren of those who fought in the the Basque country, and Arnoldo Otegi, 5 war‹to organise civic groups that began to the leader of Batasuna, ETA’s banned po• 10 CIU 10 search for and dig up graves. In October Mr litical wing, but they got nowhere. Basque 6 Garzón charged Franco and 34 of his The government rightly insists that it Nationalist Party 7 (equally dead) henchmen with crimes cannot make political concessions in re• Union, Progress 1 against humanity. This may open the way turn for an end to violence. It can negotiate and Democracy na for charges against others who are still about ETA’s 600 prisoners (200 more are Catalan 3 alive. Many lawyers believe that Mr Gar• in French jails), but only with great cau• Republican Left 8 zón is on shaky legal ground. tion. Public opinion, prompted by well•or• Elected 5 Others deputies 8 It is to Mr Zapatero’s credit that nobody ganised victims’ associations, objects to now disputes that relatives should have early release for murderers. Conversely, of• Source: Ministry of the Interior The Economist November 8th 2008 A special report on Spain 5

2 tionalists themselves. Mr Maragall de• for two years by a wrangle between the with kindness (although that is not quite manded‹and Mr Zapatero agreed to‹the two main parties over the nomination of how he puts it). renegotiation of Catalonia’s 1979 autono• new tribunal members. Perhaps the big• Mr Rajoy did enough to cling on as the my statute. The new statute, in a convolut• gest worry about the Catalan statute is that PP’s leader, despite having lost two elec• ed preamble, nods in the direction of re• a measure of constitutional signi†cance tions. At a party congress in June he re• cognising Catalonia as a nation, grants it did not have bipartisan backing and ap• placed Mr Aznar’s right•wing friends with privileged status within Spain and gives it pears to have been introduced for party• new, younger and more centrist leaders, in• more money and power. That has pleased political advantage. Victor Pérez Díaz, a so• cluding Ms de Cospedal. He also hinted many politicians in Catalonia. Seen from ciologist at Madrid’s Complutense Univer• that it was time to drop crispación in favour the rest of Spain, it looks at best unneces• sity, says that Mr Zapatero’s Socialists of seeking consensus on some of the big is• sary‹Jordi Pujol, the CiU leader who Œhave crossed a line. They’ve broken the sues facing Spain. In future Mr Zapatero headed Catalonia’s regional government spirit of the rules but not the rules. may †nd the PP harder to provoke. The So• for 23 years, never pushed for it‹and at The Catalan statute proved to be good cialists are talking about a new abortion worst another stride down a slippery politics. Mr Zapatero won his second term law which their chief whip, José Antonio slope that will end in the country’s disinte• in March this year thanks to an over• Alonso, calls the Œbiggest challenge of this gration. In protest, some Madrileños even whelming vote in Catalonia. As Ms de Cos• legislature. The PP thinks the existing law, mounted a brief boycott of cava, the Cata• pedal points out, the PP outpolled the So• which allows abortion in quite narrowly lan sparkling wine. The head of the army cialists elsewhere. Mr Zapatero also did de†ned circumstances, should be properly spoke out against the statute and was †red, well among younger voters, who like his applied rather than changed. in the †rst instance of military dissent for a Œexpansion of freedoms‹and were left But according to Ms de Cospedal, in fu• quarter of a century. cold by Mr Rajoy. But despite four years of ture her party will concentrate its attack on Maria Dolores de Cospedal, the PP’s strong economic growth, Mr Zapatero did the economy. Mr Zapatero knows that he is general secretary, argues that some points not win an absolute majority in the lower in for a tougher four years than his †rst. in the new statute violate the constitution. house of parliament. It was the nationalist ŒThe †rst term was economically easy but It has yet to be approved by the Constitu• parties, notably ERC, that were the main politically diˆcult. This term will be politi• tional Tribunal. That body enjoys little losers in the election. A senior oˆcial cites cally easier but economically more diˆ• prestige and includes few constitutional this as a vindication of the government’s cult, he acknowledges. The chances are lawyers. Moreover, it has been paralysed strategy of, in e ect, killing nationalism that he will face trouble on both fronts. 7 How much is enough?

Devolution has been good for Spain, but it may have gone too far

HE hardest problem for the authors of liberal thinking. Second, by bringing deci• cultural and tourist magnet, started o by TSpain’s democratic constitution was to sions about services closer to the people it its Guggenheim Museum, has become a strike a balance between the central gov• has improved them. Third, it encourages textbook case of urban regeneration. ernment and the claims of Catalonia, the competition between regions. The rivalry All this has come at a political price. Basque country and Galicia for home rule. between Barcelona and Madrid may have First, it has led to a renaissance of an old The formula they came up with was acquired an edge of mistrust, but it is in es• Spanish political phenomenon, the ca• known as café para todos, or co ee for all: sence a creative tension. And fourth, the cique or provincial political boss, as An• Spain was divided into 17 Œautonomous system has reduced regional inequalities, tonio Muñoz Molina, a leading novelist, communities (plus the enclave cities of or at least stopped them widening. points out. Mr Pujol ran Catalonia for 23 Ceuta and Melilla on the Moroccan coast), To get a sense of the success of decen• years; Manuel Fraga, a former minister un• each with its own elected parliament and tralisation, head not to Catalonia or the der Franco who founded the forerunner of government. This estado de las autonomías Basque country but to the south. In the the PP, ran Galicia for 15 years; and Manuel seemed a neat solution. Over the past 30 1970s Andalucía seemed much closer to Chaves, a Socialist who has headed Anda• years more and more powers and money Africa than Europe‹and not just geograph• lucía’s regional government since 1990, is have been devolved. The regional govern• ically. Rural labourers lived in semi•servi• said to reign rather than govern. ments are now responsible for schools, tude and one adult in †ve was illiterate. These modern princes have their universities, health, social services, cul• Now it has narrowed the gap with the rest courts. ŒEvery regional government wants ture, urban and rural development and, in of Spain in many ways. The south is still its own universities, contemporary•art some places, policing. But it is becoming poorer than the north, but Spain no longer museum and science museum, says Josep clear that even as it has solved some pro• has anything like Italy’s mezzogiorno. Ramoneda, who heads the Centre for Con• blems, decentralisation has created others. In other parts of the country Valencia temporary Culture in Barcelona. ŒIn the The estado de las autonomías has sever• and Zaragoza have become thrusting cities United States there’s only one Hollywood. al clear bene†ts. First, as Mr Zapatero says, with an economic and cultural life of their Here they want 17. In Andalucía the re• Œit spreads power and impedes its concen• own, and Bilbao’s metamorphosis from a gional government is by far the biggest em• tration, and in that way re‡ects Œthe best centre of declining heavy industry into a ployer, and the biggest advertiser in the re•1 6 A special report on Spain The Economist November 8th 2008

2 gional press. Every regional government Brittany are within France. a diverse group of public †gures ranging has its own television station. Mr Zapatero Perhaps because the historic claim to from Placido Domingo, a tenor, to Iker Ca• has taken to holding regular Œpresidents’ nationhood is shaky, language has become sillas, Real Madrid’s goalkeeper, signed a conferences with his regional counter• an obsession for the nationalists. Franco Œmanifesto in defence of the right of citi• parts. The latest one attracted 600 journal• banned the public use of Catalan, Euskera zens to be educated in Spanish. They were ists. ŒIt looked like the UN General Assem• (Basque) and Gallego. The constitution denounced as ŒCastilian nationalists in bly, with six or seven satellite trucks made these languages oˆcial ones along• the Socialist press. But they touched a outside, notes Enric Juliana, a journalist side Spanish in their respective territories. nerve. Many thoughtful Catalans believe for La Vanguardia, a Barcelona newspaper. In Catalonia the oˆcial policy of the Gen• that Catalan would be safe if it remained The regional governments even get in• eralitat (the regional government), under the language of primary schools, but that volved in foreign policy. Some have aid both the nationalists (some of whom are Catalonia would gain much by allowing a budgets. Mr Muñoz Molina, who was the really localists) and now the Socialists, is choice between Catalan and Spanish in director of the New York oˆce of the Insti• one of Œbilingualism. In practice this secondary schools. tuto Cervantes, a body to promote Spanish means that all primary and secondary culture, recalls that regional presidents schooling is conducted in Catalan, with The power of language would turn up in the city with vast entou• Spanish taught as a foreign language. Cata• The argument about language is really rages. Most of these missions were badly lan is also the language of regional govern• about power. ŒThe problem with national• organised and achieved nothing except fa• ment. A Spaniard who speaks no Catalan ists is that the more you give them, the vourable coverage in their captive media. has almost no chance of teaching at a uni• more they want, says Mr Savater. What versity in Barcelona. A play or †lm in Span• some of them want is independence; all of Co ee just for us ish will not be subsidised from public them use this as a more or less explicit But this panoply of decentralisation has funds. ŒIf we don’t make a big e ort to pre• threat to gain more public money and not placated the politicians in Catalonia, serve our own language, it risks disappear• powers. The polling evidence suggests that the Basque country and Galicia. That is be• ing, says Mr Mas. no more than a †fth of Catalans are re• cause they never wanted café para todos: Catalan and Spanish are more or less motely tempted by the idea of indepen• they wanted it just for themselves, as a rec• mutually comprehensible. Not so Euskera, dence. The †gure for Basques is around a ognition that they were di erent. They still which does not belong to the Indo•Euro• quarter, despite 30 years of nationalist self• want that, no matter that Spain is now an pean family of languages. The Basque gov• government and control of education and extraordinarily decentralised country in ernment allows schools to choose be• the media, and despite the departure of which the Basques, for example, enjoy a tween three alternative curriculums, one around 10% of the population because of greater degree of home rule than any other in Euskera, another in Spanish and the ETA’s violence, points out Francisco Llera, region in Europe. Their demands make it third half and half. But in practice only a (Socialist) political scientist in Bilbao. diˆcult to draw up a stable and perma• schools in poor immigrant areas now o er ETA’s political support is declining, nent set of rules. the Spanish curriculum. Despite these ef• though not vanishing. The PNV is split be• Catalan and Basque Œnationalists ar• forts, Basque and Catalan are far from uni• tween a pro•independence wing led by gue that unlike, say, La Rioja or Murcía, versally spoken in their respective territo• Juan José Ibarretxe, the president of the re• their territories are nations, not regions ries: only around half of Catalans gional government, and home•rulers in (nor Œnationalities, in the tortuous formu• habitually use Catalan and about 25% of the party leadership. Mr Ibarretxe wants to lation of the constitution), and invoke his• Basques speak Euskera. hold a referendum on the right of Basques tory to support their claim. ŒHere the con• The nationalists’ linguistic dogmatism to self•determination. Mr Aurrekoetxea ar• ‡ict dates from 1836, insists Joseba is provoking a backlash. Earlier this year gues that ETA should not have a veto over Aurrekoetxea, a leader of the Basque Mr Savater, the philosopher, together with whether Basques can peacefully express a Nationalist Party (PNV), referring to the view on the future. Carlist war after which the central govern• The government, parliament and the ment revoked the Basques’ †scal privileges courts have all blocked the referendum (restored in 1979). ŒCatalonia was always plan Œbecause it is against the constitu• distinct, says Artur Mas, who replaced Mr tion, says Mr Zapatero. ŒIt would make Pujol as leader of CiU. It descends from the ETA right in †ghting on the basis that this is medieval kingdom of Aragón, and re• an oppressed people, says José Antonio belled against Madrid in 1640 and in 1701. Pastor, a Basque Socialist. He and many But Catalan and Basque nationalism other non•nationalist politicians and their are creations of the late 19th century. They families must live with round•the•clock stem from industrialisation, which made bodyguards. In parts of the Basque coun• these the richest regions in the country, tak• try, in the tight rural valleys on the borders ing in migrants from elsewhere in Spain. At of Vizcaya and Guipúzcoa, non•national• the time the Spanish state, unlike its French ists cannot campaign freely. The Socialists counterpart, lacked the resources to inte• hope to win a Basque regional election grate the country, says Antonio Elorza, a due in March. To improve their chances, Basque political scientist at Madrid’s Com• they are following their Catalan peers in plutense University. Otherwise Catalonia embracing cultural nationalism. and the Basque country would have been Buying o the Basque and Catalan na• as content within Spain as Languedoc and tionalists with more money has become 1 The Economist November 8th 2008 A special report on Spain 7

2 harder. The central government now ac• alan and Basque nationalists will only ac• counts for just 18% of public spending; the cept a confederation of several Œnations. regional governments spend 38%, the ay• The PP also opposes federalism. untamientos (municipal councils) 13% and In the meantime Spain must muddle the social•security system the rest. But un• on. ŒThe great Spanish project is not in dan• der the new Catalan autonomy statute ger, but it’s like a plant that requires con• more money has to be devolved. Over the stant tending, says Narcís Serra, who used next seven years Catalonia will have to be to be Mr González’s vice•president and given a share of public investment equiva• now runs Caixa Catalunya, a savings lent to its weight in the Spanish economy, bank. ŒIt’s important that Catalonia is com• which will amount to an extra ¤5 billion a fortable in the project. The government in year. Previously Catalonia, although Madrid could make some gestures to the Spain’s fourth•richest region, received less regions, such as moving some regulatory public spending per head than several oth• agencies or other national bodies out of ers. It complains that its commuter trains, the capital. And would it really be the end in particular, have been starved of funds. of Spain if the Basques, like the Welsh, had The Basques have no such worries: their own national football team? each Basque province and Navarre collect The pride of Catalonia Elsewhere in the country anti•national• their own taxes and hand over less than ism is starting to stir. Mr Savater and Rosa 10% to the central government in Madrid. decentralisation. As regional governments Díez, a former Basque Socialist leader, But they bene†t from central•government acquire more and more power to regulate, have set up a new party of the radical cen• defence spending, and they are net recipi• businesses face higher compliance costs. tre called Union, Progress and Democracy ents from the social•security system. As a Now that the government employment (UPyD), in an e ort to combine social liber• result, public spending per person in the service has been decentralised, José María alism with a defence of the idea of Spain. Basque country is the highest in Spain. Fidalgo, the general secretary of the Work• They hope to pro†t from the rising disillu• The new Catalan statute requires the ers’ Commissions, the largest trade•union sion with both the main parties. Even government to strike a new regional †• federation, worries that jobseekers have to though it lacked money and access to the nancing deal, even though the one in 2001 look at 17 di erent websites. media, it won 1.2% of the vote in the March was supposed to be †nal. But it is to the It would have been easier for all con• election, the same as the PNV. But because central government that Spaniards will cerned if Spain had adopted federalism in the electoral system disproportionately re• look for unemployment bene†ts and for 1978. That would have set clear rules and wards geographically concentrated votes, spending to alleviate recession. Local gov• aligned responsibilities for taxing and the UPyD secured only one deputy, Ms ernments are likely to su er budget cuts by spending. The Senate could have become a Díez, against the PNV’s six. It hopes to do 2010, if not next year. place where the regions were formally rep• better in an election to the European Parlia• The government’s ability to carry out resented and could settle their di erences, ment next June, for which the whole coun• economic reforms is also compromised by akin to Germany’s Bundesrat. But the Cat• try will count as a single constituency. 7 Banks, bricks and mortar

An already solid †nancial system faces more consolidation

N THE outskirts of every Spanish city holds are set up every year; in addition, of GDP, according to the OECD. In the Oand town, and even some villages, some 150,000 foreigners buy houses, 1950s half the population rented. But the you will see neat rows of houses or blocks mainly northern Europeans in search of law heavily favours tenants over land• of ‡ats in various stages of (in)completion. second homes. The construction boom lords, which caused a shortage of rented Cranes rise in their midst. Newly tarred was exaggerated by a potent mixture of property. As Spaniards got richer they roads with street lights continue on into va• perverse incentives. First, money was poured their savings into housing. Fernan• cant land. All is silent. What hit Spain was a cheap after Spain adopted the euro. In set• do Encinar of Idealista.com, an online es• combination of its own excesses and the ting interest rates, the European Central tate agency, notes that Spain has about 50% e ect of toxic †nancial assets elsewhere. Bank is guided mainly by economic condi• more homes than it has households. Many When the †rst signs of the credit crunch tions in Germany and France. Because of middle•class families have a second home appeared in August 2007 Spain was in a Spain’s higher in‡ation, interest rates there near the beach or in the grandparents’ vil• frenzy of building, putting up some were close to zero in real terms. lage in the country, or as an investment. 700,000 new housing units a year‹more Second, policy and culture interacted to There is no tax on empty property. than France, Germany and Italy combined. make a housing bubble more likely. Mort• The third factor was a powerful nexus Thanks to immigration, Spain’s popula• gage•interest payments are partially de• of local politicians, property developers tion has increased from 40m to 45m since ductible from income tax. Total †scal subsi• and the cajas de ahorros (savings banks) 2000. Even so, only 400,000 new house• dies for home•ownership equal around 1% that make up half of the country’s †nan•1 8 A special report on Spain The Economist November 8th 2008

2 cial system. Spanish towns are typically strength of Spain’s †nancial system. So far that, margins are widening. Santander’s quite dense, ending abruptly in open coun• there has been no Spanish equivalent of pro†ts in Spain have been growing at 20% tryside. Building on vacant land requires Northern Rock, a British mortgage lender a year. Mr Sáenz expects that †gure to re• the ayuntamiento to extend the town lim• that had to be nationalised, let alone a For• main in double digits, but that will require its, which then entitles it to 10% of the de• tis or a Lehman Brothers or AIG. That is be• cost•cutting, including early retirement of velopment land. Selling this 10% back to cause those earlier recessions and their at• some of the bank’s sta . the developer became a main source of tendant bank collapses bequeathed both Spain accounts for 40% of BBVA’s pro• revenue for many ayuntamientos (some• sound regulation and relatively conserva• †ts (and Mexico for 26%). Francisco Gonzá• times councillors also got bribes to ap• tive banking practices. As the †nancial lez, its chief executive, notes that the bank prove the new developments). In turn, the boom got under way, the Bank of Spain in• has generic provisions of ¤3.5 billion and local politicians who control the cajas, troduced a countercyclical element to should be able to deal with an increase in which are quasi•mutual out†ts, provided loan•loss provisioning. ŒWe think that risk overdue loans without pro†ts being a ect• the developers with loans. With house• arises not when a loan becomes overdue ed. The bank’s net income is still growing price rises averaging 12% a year for most of but when it is granted, says Mr Viñals. So at 10%, he says, compared with over 20% this decade, it seemed like a one•way bet. banks have to set aside a small generic pro• last year. ŒWe’re comfortable with our cap• Then the bet suddenly turned sour. The vision when issuing a loan, as a kind of in• ital position, have a lot of liquidity and rel• costas were hit †rst. Overbuilding and the surance policy. The Bank later obliged any atively good asset quality in relation to popping of the housing bubble in Britain institution setting up an o •balance•sheet creditors, he adds. ŒWe’ll pass through a (the largest single source of second•hom• Special Investment Vehicle to take a large storm, there’ll be wounds, but those who ers) caused prices to slump. Next, the credit capital charge‹large enough to dissuade emerge will be winners. squeeze kicked in with a vengeance. Now them from doing so. The third•largest †nancial group is Bar• almost 1m unsold homes sit vacant across celona’s La Caixa, the biggest of the cajas. the country. Prices of existing homes in The solid few Two•thirds of its loans are mortgages and Barcelona and Madrid have fallen by up to After the frantic consolidation of the early another 12% are to developers and building 10% in the past year. Mr Encinar reckons 1990s Spain is left with two giant banks, †rms, according to Juan María Nin, its chief that average prices will fall by up to 50% in Santander and BBVA; a handful of mid• executive. But it has a large cash pile, is well nominal terms (though rather less in real dling ones; scores of smaller ones; and 45 capitalised and can draw on a portfolio of terms) before they stabilise. cajas. It is the cajas that have the biggest ex• industrial investments, which includes big The †rst casualties have been estate posure to mortgages and property devel• stakes in Telefónica, two energy compa• agents. In Malaga at the peak there were opers, partly because the two big banks nies, Gas Natural and Repsol, a water utili• more estate agents than hairdressers, says have chosen to grow abroad. ty, Agbar, and a toll•road operator, Abertis. Mr Encinar. Half those oˆces have closed Both Santander and BBVA have a It has recently taken stakes in banks in in the past year. The next victims are the strong capital and deposit base and have Hong Kong and Mexico as it seeks to follow property companies. The biggest, Mar• largely stuck to commercial banking, es• the big two banks in expanding abroad. tinsa•Fadesa, collapsed in July, owing ¤5.2 chewing investment banking and deriva• Mr Nin says that defaults on Spanish billion, the largest bankruptcy in Spanish tives. Spain accounts for only 35% of San• home loans will be relatively low, for sev• history. Others are in trouble, partly be• tander’s total business. ŒWe’ll clearly see eral reasons. Almost 90% of La Caixa’s cause they are sitting on land banks of un• slower growth, an increase in overdue mortgages had a loan•to•value ratio of less certain value. Then come the cajas. The av• loans and a demand for higher provi• than 80% in June; the average was 50%. erage of overdue loans in the †nancial sions, says Alfredo Sáenz, the group’s Spanish banks insist on guarantees; home• system has already climbed to 2.5% of all chief executive. The bank has spent ¤2.5 owners and their guarantors remain liable loans; for the cajas the †gure is 2.9%. José Vi• billion buying assets from its property• for the mortgage payments even if they ñals of the Bank of Spain, the central bank, company clients as a pragmatic way of re• hand back the keys of the property. And insists: ŒWe don’t see any †nancial entity ducing bad loans. In some cases it has had when workers are laid o they are entitled whose viability is compromised. But he to accept a loss on these assets. Against to unemployment bene†ts worth 80% of adds that banks and cajas will have to ad• their pay for 18 months. just their cost structures to slower growth. So the direct e ect of the property bust Mr Zapatero has said that some cajas Collapsing 3 on the †nancial system should be contain• should merge and that the government Housing starts, ’000 able. But that is not the end of the story of should help them to do so. woe. The slowdown in consumption and A private banker is blunter. He expects 900 the international credit crunch is hitting the coming recession to reshape the Span• the rest of the economy‹and will eventu• 750 ish †nancial system, as did the recessions ally hurt some banks. Both Spain’s govern• of the early 1980s and early 1990s. He reck• 600 ment and its businesses are less indebted ons that around a dozen of the smaller ca• 450 than they were last time recession struck, jas, mainly on the Mediterranean coast, but households are deeper in the red: total will have to be bailed out by merging with 300 household debt is equal to 84% of GDP stronger ones, perhaps with government 150 (still a smaller share than in Britain, Ireland support. Some smaller banks may be sold or the Netherlands). No wonder that in the to foreign institutions. 0 †rst nine months of 2008 sales of new cars If the damage turned out to be no 1992 94 96 98 2000 02 04 06 08* were down 22% on last year. Source: BBVA *Year to July worse than that, it would be tribute to the Though Spanish banks have a strong 1 The Economist November 8th 2008 A special report on Spain 9

2 deposit base, until a year ago they were re• †nancing some ¤100 billion a year in the markets, partly by issuing cédulas hipoteca• rias. These are 15•year covered bonds backed by prime mortgages and guaran• teed by the bank’s assets (Spanish banks keep mortgages on their books even after they have securitised the debt). Now they are being confused with subprime mort• gages and nobody is buying them, says Guillermo de la Dehesa, the (Spanish) chairman of the Centre for Economic Poli• cy Research, a London•based group. As an alternative the banks and cajas are bor• rowing from the European Central Bank’s emergency liquidity window, but this is a Temples of growth‹and greed short•term stopgap. The stronger banks can still issue short•term notes. States and others. Last month Mr Zapatero help to push the public debt up to 38.8% of announced a ¤50 billion fund to help the GDP next year. Squeezed, not crunched banking system. This will buy cédulas hi• In September Mr Solbes announced a Both the government and blue•chip com• potecarias and bundles of bank loans, but ¤3 billion credit line to encourage property panies are †nding credit more expensive. only those with a triple•A credit rating. The companies to let out their empty ‡ats. But Government bonds now attract a risk pre• government also raised its guarantee on that will only slightly reduce the stockpile mium of some 60 basis points (ie, 0.6 %) bank deposits from ¤20,000 to ¤100,000. of unsold homes. Reviving the rental mar• over their German equivalents, and com• Days later it o ered to guarantee up to ket requires a new law to help landlords. panies have seen the cost of loans rise by ¤100 billion of bank borrowing this year The sooner house prices fall, the faster up to three times that amount. So far, how• and an unspeci†ed sum next year, as part Spain will recover from the bust. The ever, Spain has faced merely a credit of a co•ordinated European e ort to un• housebuilding industry needs to shrink squeeze rather than a full•blown crunch in gum the money markets. from a swollen 9% of GDP in 2007 to a which credit is no longer available, says Mr The government had already done more normal 5% or so. Mr Solbes says that de la Dehesa. some †scal pump•priming earlier. Shortly this year 160,000 fewer houses are being That is not how it feels to many busi• after the election it announced a ¤400 re• completed than in 2007, which alone im• nesses, hit by lack of liquidity and slowing bate for every taxpayer, half of it paid in plies a 1% fall in GDP. Yet each job in the consumer demand. Having previously re• June and the other due in December. But building industry also generated three or jected calls from bankers and businesspeo• falling tax revenues have swiftly pushed four jobs indirectly, says Mr Fidalgo. With ple to inject liquidity into the economy, the the public †nances into the red. The draft housebuilding knocked out as the engine government ended up matching rescue budget foresees a de†cit of 1.5% of GDP this of growth and employment, Spain will measures taken by Britain, the United year and 1.9% next. The banking fund will have to †nd something to replace it. 7 In search of a new economy

But reforming the old one is just as important

OWN on the Barcelona waterfront, on Some ¤40m of the park’s annual bud• model, in which brainpower is more im• Dwhat used to be industrial wasteland get of ¤65m comes from research grants. In portant than the muscle of building work• before the area was developed for the 1992 the past 15 years Spain has risen fast in the ers or the sun and sand of tourism. To that Olympic games, a striking new building of world league•table of articles published in end he has created a new Ministry of Sci• wood and glass houses the Barcelona Bio• scienti†c journals, to ninth place. Jordi ence and Innovation. The minister, Cris• medical Research Park. It is a joint venture Camí, a neuroscientist who is the research tina Garmendia, is a founder of Genetrix, a between the Generalitat, the Barcelona park’s founding director, hopes to use Œthe biotech start•up which she says is about to city council and Pompeu Fabra University. glamour of Barcelona to attract leading become the †rst European company to Some 800 scientists, about a third of them scientists from around the world and com• launch a drug derived from stem cells. foreigners, work at the long white benches pete for talent with London, Singapore and Public spending on research and devel• with their jumble of ‡asks, instruments Cambridge, Massachusetts. opment has tripled since 2000. The pro• and computers. The six di erent research No wonder Mr Zapatero came to open blem is that private spending is negligible. groups scattered around the building span the building in August last year. The re• The answer, says Ms Garmendia, is to various aspects of biomedicine, epidemi• search park exactly matches his govern• build bridges between universities and ology and genomics. ment’s idea of Spain’s Œnew economic companies. Spain is poor at turning re•1 10 A special report on Spain The Economist November 8th 2008

2 search into patents and products. Invest• and are not accountable to anyone else, ment in biotech, for instance, is now Expensive 4 but in practice they lack the tools to man• ¤60m, up sixfold in eight years, but still Consumer prices, % increase on previous year age their institutions. The result is a para• only a tenth of the British or German total. dox. ŒUniversities have autonomy: they Miguel Sebastián, the industry minis• 5.0 can do whatever they want as long as they ter, talks up Spain’s growing prowess and 4.5 do the same as everyone else, says Xavier Spain IESE potential in a long list of innovative busi• 4.0 Vives, an economist at . Universities nesses, ranging from renewable energy to have been handed to Ms Garmendia’s aerospace and information technology. In 3.5 new ministry. She agrees that their gover• some of these Spain is already a world 3.0 nance needs reform and that they should leader. Take a high•speed train across the 2.5 be encouraged to specialise. But she may Euro area meseta, the high plain with hot, arid sum• 2.0 lack the political weight to achieve this. mers and harsh winters that covers much Productivity faces other constraints as of Spain, and your eye will be caught by well. For a start there is too much red tape, 2000 01 02 03 04 05 06 07 08* batteries of upturned solar panels along To make things more complicated, some Source: EIU *Forecast the tracks, tilted to catch the relentless aspects of the regulation of business are Spanish sun. The mountain ridges that cor• now handled by regional governments. rugate the meseta are crowned by gigantic ish education, which seems to be declin• Some parts of Spain, such as Catalonia, wind turbines‹an appropriate sight in the ing. William Chislett, of the Royal Elcano have laws to restrict shopping hours and land of Don Quixote. Institute, a think•tank, points out that one block out•of•town stores, aimed at pre• The renewables industry is subsidised, in three secondary pupils now drops out, serving small food shops (many of which as it is everywhere, but the country now double the EU average, and that 70% of 14• are now run by Chinese immigrants) and gets 22% of its electricity from this source, and 15•year•olds in Madrid fail their maths preventing suburban sprawl (from which and three of the world’s †ve biggest renew• exams. Teachers complain that their pro• Madrid, more liberal in these matters, now ables companies are Spanish. They are de• fession has lost status. School manage• su ers). But this comes at a cost. José Luis veloping a world•class network of techno• ment has been transferred to regional gov• Escrivá, BBVA’s chief economist, thinks logically sophisticated suppliers, and costs ernments without introducing national that such restrictions on retailing are one are falling as the technology improves. But standards or a national inspection system. reason for Spain’s higher in‡ation; he the country, which has to import all its gas The debate about schooling in the past notes that Catalonia tends to have higher and oil, needs a broader discussion about four years has been mainly about Mr Zapa• in‡ation and slower growth than Madrid. energy policy. The PP wants an urgent de• tero’s insistence on civics lessons, which Spain has built an impressive network bate on whether to expand nuclear power. many feel is a side issue. of motorways and high•speed trains, Mr Zapatero does not. The state of the universities is little bet• known as AVEs. Mr Zapatero boasts that ter. Spain has three world•class business by 2010 it will have more kilometres of Plodding productivity schools, IESE, IE and ESADE, all privately high•speed railway than any other country Innovation takes time, and on its own it is run. But no Spanish university appears in in Europe, and that every Spaniard will not enough: Spain also has to make its ex• the list of the world’s top 150 compiled by live within 50 kilometres (30 miles) of an isting economy more eˆcient. ŒWe need to Shanghai’s Jiao Tong University. Spain’s AVE station by 2020. The punctual and raise productivity in hotels and retail as public universities, which make up the comfortable AVE links Madrid and Barce• well as in biogenetics. We need to do vast majority, are trapped in a rigid, bu• lona in just 2 hours and 40 minutes. everything better, starting with education reaucratic system that o ers few incentives But Spanish companies †nd that it can and regulation, says Mr Rato, who now to strive for excellence, says Mr Fernández cost up to three times as much to get their works for Lazards, an investment bank. of Nebrija University (which is private). goods to the French border than from there Productivity growth has traditionally Rectors are elected by assemblies of stu• to Poland, says Jordi Canals, the dean of been slow in Spain. According to the dents, professors and administrative sta IESE. That is partly because of Spain’s diˆ• OECD, between 1990 and 1997 it averaged cult geography, but also because nearly all just 0.3% a year, a third of what it was in goods go by road rather than by rail. It Germany, France and Italy, the three largest Jobs for all 5 would have been more sensible to up• euro•area economies. And more recently Quarterly unemployment rate grade the existing railway network for things have got worse: the OECD reckons and foreign population, % both freight and passenger trains rather that between 1998 and 2006 total factor Unemployment Foreign population than to build the expensive AVE network. productivity (ie, the combined e ect of la• A train from Barcelona to Bilbao, for exam• 30 * 12 bour, capital and technology) actually fell 25 10 ple, takes at least nine hours in grubby car• by 0.2% a year. A Spanish government riages built in the 1960s. In theory the AVE study disagreed, †nding that productivity 20 8 network could be used for freight trains at rose during that period, but only by 15 6 night. The government says it will intro• † around 0.3% a year, and that half of the 10 4 duce competition on the railways and pri• country’s economic growth came from im• vatise RENFE, the state railway company. 5 2 migration. Part of the explanation for the But nobody expects this to happen soon. poor productivity †gures is that many new 0 0 Spaniards as individuals are almost un• jobs were in low•value•added businesses. 1996 98 2000 02 04 06 08 failingly friendly and kind. But when they Source: National Statistical Institute *Provisional †To Q2 Another reason is the quality of Span• have to serve customers, something 1 The Economist November 8th 2008 A special report on Spain 11

2 strange often happens: they become de• productivity. The country’s trade unions fensive and unhelpful. The ministers say are unusually moderate, having learnt that they hope to use the EU directive on com• unreasonable wage demands in the 1980s petition in service industries to shake up led to unemployment in the early 1990s. these industries and expose them to more Mr Sebastián claims that wages in real competition. Ths †rst step is a bill to cut terms have not increased over the past de• back red tape for these businesses. cade, despite the rapid growth in employ• ment. That is partly because of reforms in• Slow justice troduced by Mr Aznar but mainly because They would do well to move on to the judi• of increased ‡exibility thanks to immigra• ciary. ŒWe’re still to a large extent in the 19th tion. The upshot, though, has been a dual century, says José Antonio Martín Pallín, a labour market: some 30% of the workforce retired justice of the supreme court. The are governed by temporary contracts and courts still follow a procedural code dating have no job security, whereas the other from 1882. Evidence is mainly in writing, 70% enjoy protection that makes sacking with little oral testimony and many oppor• them expensive and diˆcult. This arrange• tunities for delay. A typical civil case can of a shortage of judges, but also because ment holds down both wages and perma• take up to eight years, says Mr Martín. For the courts have stuck to the relaxed work• nent employment. example, it took ten years for the courts to ing hours they got used to under the Franco Moreover, permanent workers are used decide that Marbella’s urban•develop• regime. Administrative sta in the higher to annual pay increases indexed to in‡a• ment plan violated environmental•protec• courts work only in the mornings but are tion under nationally negotiated agree• tion laws: this ruling now requires some paid for a full day’s work. ments. A manager at a Spanish industrial 30,000 homes to be demolished. Problems in the labour market also company with factories abroad points out Things move so slowly partly because bear some of the blame for Spain’s low that his workers in Germany have agreed 1

Attitudes to immigration are A cooler welcome turning more cautious

OR much of the Middle Ages, after the greenhouses of Almería and in domestic nesties to a total of 1.2m illegal immi• Finvasion of Muslim Berbers and Arabs service. Cubans and Dominicans help out grants, bringing them out of the black in the eighth century, Spain was a multi• as carers. Black African street vendors economy. Moreover, Spain’s welfare state cultural country. Several Christian king• hawk bags and ‡owers. is newer than those of other western doms pushed the Arabs south, †nally re• Spain has so far lived in harmony with European countries and there is less of a conquering the last remnant of the these newcomers. It helps that most Span• sense that immigrants are straining public Caliphate of Al•Andalus in 1492. There ish families remember the time from the services (though in schools they are). had been collaboration as well as con‡ict. 1950s to the 1980s when at least one of Spaniards also know that the social•secu• But the victorious and dogmatic Catholics their members emigrated to †nd work. It rity system has been saved from actuarial ordered †rst the forcible conversion of helps, too, that around 1.5m of the new• insolvency by the contributions of young Jews and Muslims and, eventually, their comers are Latin Americans. ŒHistory, lan• immigrants. expulsion. Since the early 17th century guage and similarity of culture have all According to Mr Jiménez, the newcom• Spain has been, oˆcially at least, a mono• eased integration, says Raúl Jiménez of ers have generally been treated well, but lithically white Christian country. the Rumiñahui Association, a group that he and many others worry that rising un• Until recently. In the past decade some helps Ecuadorean migrants. But Spain employment will bring intolerance. There 5m immigrants have arrived in Spain. In now also has 1.1m Muslims. Mosques are have always been isolated cases of attacks all, 12% of the population is now foreign• in use in Granada again for the †rst time in on immigrants, and recent months have born, up from 3% in 1998. During that per• 500 years. Despite the Islamist bombings seen a slight increase. Over the past year iod Spain has absorbed more immigrants of 2004 there has not been an outburst of both the main parties have toughened than any other country except the United Islamophobia. The Muslims in Spain are their policy. Mr Rajoy campaigned against States. Some 700,000 of those foreigners Œexceptionally moderate and well•inte• Mr Zapatero’s amnesty, and the govern• are sun•seeking Britons, and there are grated, according to Mr Rubalcaba, the in• ment has taken more energetic steps to many Germans too. But most of the new terior minister. However, since the bomb• prevent illegal immigration. It has also un• arrivals come from poorer countries. Mo• ings the ministry has rounded up a few veiled a scheme to allow migrants to draw roccans tend the sunloungers on the radical groups involved in recruiting and their unemployment insurance as a lump beaches and toil on building sites along• fundraising for al•Qaeda. sum if they return to their home country side Bulgarians and Romanians. Ecuado• What has also eased absorption is that and renounce their residence rights in reans and Bolivians work in the plastic successive governments have granted am• Spain. Nobody expects many takers. 12 A special report on Spain The Economist November 8th 2008

2 to longer hours with no extra pay, and that business: ŒAny reform without that under• more eˆcient. Such reforms are not easy those in America have accepted a pay in• standing is not very useful. That suggests politically, and do not produce quick re• crease below the rate of in‡ation. Unless the talks may not achieve much. Some sults, argues a former minister in Mr Az• his Spanish trade unions follow suit, he †rms will doubtless make local agree• nar’s government. He worries that Mr Za• says, he will have to lay o workers. ments with the unions; certain car fac• patero is sending the wrong message to The government has begun a Œsocial di• tories, for example, are imposing shorter Spaniards‹Œthe idea that you don’t need alogue with the unions and the private working hours. But there is a strong pos• to worry, we’ll cover your needs. sector. Mr Fidalgo, of the Workers’ Com• sibility that increased competitiveness In August the prime minister chose a missions, a formerly communist trade un• will be achieved through job cuts. political rally to announce a 6% increase in ion, talks so eloquently about the need to Many of the steps required to make the pensions, even though the government make the economy more competitive that economy more eˆcient are outlined in the might have done better to husband its re• you might mistake him for a World Bank government’s 2005 national reform plan, serves to cope with an ageing population oˆcial. But he does not think that labour but Mr Zapatero’s detractors claim that he now that immigration is tailing o . ŒThe is• needs to become more ‡exible. His main has been slow to implement this. Most of sue of reforms is not always linked to eco• concern is to make sure that the govern• the obvious structural reforms had already nomic growth, as it should be, concedes ment †nds the money to pay unemploy• taken place before he came to oˆce: for ex• Mr Solbes. ŒThe prime minister is more ment bene†t (which it has said it will) and ample, the central government has little sensitive to the issue of social rights. Re• to reform the state employment service. left to privatise. Much of what is now need• cession may change Mr Zapatero’s priori• Mr Zapatero says that the government ed involves o ering the right incentives‹to ties. But for the moment Spain’s best hope will not implement any changes that do run universities and schools better, to hire of recovery lies with an impressive array not have the support of both unions and rather than †re workers and to become of multinational businesses. 7 The Spanish legion

Modern Spain has bred a remarkable range of successful companies

RANCO was still alive when your corre• he joined two other banks in buying ABN bought Sovereign Bancorp, an American Fspondent †rst visited Madrid. En• AMRO, a Dutch †nancial group, he walked bank, for a seventh of the price it paid per sconced in the centre of the meseta, it had o with the best bits. The deal turned San• share for a minority stake in 2005. Mr the sleepy air of a compact provincial tander into the third•biggest bank in Brazil, Sáenz says that the bank is receiving many town of bureaucrats. In the subsequent de• and months after acquiring ABN’s Italian o ers: ŒEvery day they’re bringing up cades, perhaps nowhere else in western operation Mr Botín sold it for ¤3.4 billion corpses in carts. We have to be very cool• Europe has changed so dramatically. Ma• more than he paid for it. headed. The group is Œhappy with its cur• drid is now a sprawling metropolis of of• In this year’s carnage Santander has rent 50•50 split between emerging and de• †ce parks and housing developments been pecking at banking carrion. It veloped markets, but the growth priority is stretching north and west towards the dis• snapped up one troubled British mortgage continental Europe. ŒOur home market tant Sierra de Guadarrama, all linked by a lender, Alliance & Leicester, and the depos• isn’t Spain, it’s the euro area, he says. spaghetti bowl of motorways and a metro it book of another, Bradford & Bingley. It Mr Sáenz attributes Santander’s suc• that has more than doubled in size. It is cess to three things. The †rst is Œexcellent here that you †nd many of the new Span• execution, which includes its computer ish multinationals. systems but also good management of On a 150•hectare (375•acre) site beside costs, people and risks. The second is its de• the outermost of Madrid’s three ring roads cision to stick to commercial banking in• at Boadilla del Monte, Banco Santander stead of going for riskier ventures. And has built a new headquarters. With its low third, Œwe haven’t made big mistakes in buildings set in parkland beside a golf acquisitions. There were some errors, such course and groves of old olive trees, it has as buying a bank in Argentina before the the air of an American university campus. 2001 collapse and a ‡irtation with invest• It is a statement about how far Santander ment banking in the 1990s, says Mr Sáenz. has come and where it wants to go. In three But those do not amount to much: ŒWe decades Emilio Botín, the chairman, has don’t follow fashion. turned an obscure provincial bank into Eu• The combination of international am• rope’s second•largest, behind HSBC. bition and risk•aversion is characteristic of For its †rst forays abroad, back in the Spanish business. It is complemented by a early 1990s, Santander chose Latin Ameri• dash of herd behaviour. Most of the Span• ca. It subsequently moved into Britain, ish multinationals began their internation• buying Abbey in 2004. Mr Botín’s deal• al expansion in Latin America in the 1990s, making has been shrewd. When last year Banking on Botín with encouragement from Felipe Gonzá•1 The Economist November 8th 2008 A special report on Spain 13

The answer is blowing in the wind

2 lez. Having often overpaid there to start which the Spanish government wanted to little•known industrial †rms scattered with, they have made big pro†ts in the past block‹a stance for which it was later criti• around the country. ŒThere is a Spanish few years. In the past month, however, cised by the European Commission. Mr Mittelstand, says Mr Canals of IESE. An ex• worries about Latin America have hit the Entrecanales insists he was motivated by ample is Viscofan, a Pamplona•based pro• share prices of some Spanish †rms. business considerations, not politics: ŒIt ducer of man•made casings for sausages For several, the next stop was Britain was a political battle in which I was in the and other meat products. Six of its seven (Telefónica acquired O2, a mobile opera• middle. Certainly the deal was good busi• factories are outside Spain, as are more tor; Ferrovial, perhaps ill•advisedly, bought ness. Italy’s ENEL bought 67% of Endesa’s than 80% of its sales of ¤506m. It makes BAA, an airports operator; and Iberdrola, a shares, but the agreement provides for Ac• the casings for two•thirds of the hot dogs power company, bought Scottish Power). ciona to manage Endesa and to have the sold in America, and for a large proportion Others are expanding in continental Eu• right any time after 2011 to withdraw with of English breakfast sausages. Its business rope: NH, a hotel group, bought Golden Tu• its choice of either one•third of the assets involves much research and technology. lip, a Dutch chain, and Italy’s Jolly hotels; or cash. Endesa has also given Acciona The †rm is now developing collagen pro• Planeta, a Barcelona publishing and media electricity know•how and higher Œvisibili• ducts for medical and dental use, says José group, this year bought Editis, a big French ty, says Mr Entrecanales. Antonio Canales, its chief executive. educational publisher, for ¤1billion. But he has larger ambitions: in ten Oesía, launched in 2000, is now Many are starting to look to Asia and years’ time he wants Spain to account for Spain’s second•biggest software company, the United States (BBVA has stakes in just 30% of Acciona’s business, against 80% with sales forecast at ¤220m this year. It banks in both places). Repsol’s boss since now. He is shedding non•core assets (a fu• writes specialist software for several of the 2004, Antonio Brufau, is restructuring the neral business, some motorway opera• Spanish multinationals but aims to be• company after his predecessor’s costly bet tions and parking lots) and aiming to build come more international, starting with the on Argentina with the purchase of YPF in a company making high returns from Spanish operations of European multina• the 1990s. Mr Brufau has sold a quarter of Œtechnologically complex renewables, tionals. It already has software factories in YPF to a local investor and is slowly ex• engineering and desalination projects. Brazil, Cuba, Colombia and Mexico, partly panding Repsol’s portfolio of oil and gas Many Spanish multinationals operate because its Spanish clients are there. assets, concentrating on the Gulf of Mexi• in regulated industries. Spanish business Felix Solís Avantis, a family company co, the Caribbean and north Africa. has long been close to power. Its foreign that is Spain’s biggest maker of still wine buying spree was spurred by an account• and the world’s tenth•biggest winemaker, If in doubt, specialise ing rule that allowed businesses to write has also branched out abroad. It has wi• The second big change has involved o the cost of acquisitions against tax‹a neries in eight di erent wine•producing re• branching out into new and more sophisti• loophole closed after the European Com• gions, including La Rioja and Ribera del cated businesses. That is particularly true mission ruled that it amounted to illegal Duero, and sells in 85 countries. Exports ac• of family•owned construction companies, state aid. But it is also true that some Span• counted for 44% of its sales of ¤144m last some of which saw the property bust com• ish companies are becoming world•beat• year, up from a third a decade ago. ing. Ferrovial has become a specialist infra• ers. They often base their success on tech• Many Spanish companies are now structure operator, drawing on Spain’s nology and e ective use of computer well•capitalised, with good technology long tradition of turning out good road en• systems. The best•known example is Indi• and a cadre of managers with internation• gineers. Acciona is trying to become a tex, the owner of Zara and other clothing al experience. These are important assets world leader in renewable•energy technol• shops, whose systems allow it to get as recession looms. They also have anoth• ogy. Three years ago construction account• clothes into its stores faster than rivals can. er point in their favour: the Spanish lan• ed for 80% of the †rm’s business; now it Abel Linares of Oesía, a software †rm, ar• guage. Mr Linares, for example, says he makes up only 40%. The rest comes from gues that Spanish †rms were lucky be• sees it as a competitive advantage for Oe• electricity, renewable energy and water• cause new technology arrived just as their sía. It makes it harder for rivals such as Ac• desalination projects. That transformation country was entering the EU; many of centure or Capgemini to poach his Latin is the work of José Manuel Entrecanales, them bought more up•to•date equipment American software engineers. So it is iron• whose grandfather founded the company. than competitors abroad. ic that politicians in some parts of Spain Mr Entrecanales engineered a dawn Behind the front rank of Spanish multi• are now doing their best to discourage the raid in which he bought 26% of the shares nationals is a second cohort of medium• use of a language spoken by 420m people, in Endesa, Spain’s electricity giant. Endesa sized businesses that are following in their more than any other except English, Man• faced a hostile bid from Germany’s e.ON globetrotting footsteps. Many of these are darin Chinese and Hindi. 7 14 A special report on Spain The Economist November 8th 2008

The perils of parochialism

Europe is no longer an automatic solution for Spain’s ills. But nor is navel•gazing

PANISH companies may be going glo• net contributor to EU funds, which may constitution now that it is turning 30. This Sbal. The AVEs and the motorways may change its attitude. In the †rst half of 2010 it charter has given Spain, for the †rst time in have shrunk Spain from a vast country will hold the EU presidency, which Miguel its history, a precious combination of de• that only a generation ago took days to tra• Angel Moratinos, the foreign minister, says mocracy and political stability. But it has a verse. But paradoxically many Spanish it will use to get Europe to try harder on in• few ‡aws, which are becoming more ap• politicians seem to †nd it increasingly hard novation and research and development. parent. Some amendments would be time• to look beyond their own region, let alone That sounds like a continuation of the ly. Formally embracing federalism would their own country. That imposes costs, Lisbon Agenda pushed by Mr Aznar, do more than anything else to answer the both tangible and intangible. though Mr Zapatero has seemed keener on regional question. The electoral system Mr González and Mr Aznar, in their dif• the (unrelated) Lisbon Treaty, which gives disproportionate weight to small ferent ways, had ambitions for Spain to strengthens the Brussels institutions. In• nationalist parties. Adding seats elected on play a role in the world. Mr González built deed, the country has yet to debate its in• a national basis would make it fairer. up links between Spain and Latin America terests in Europe properly. ŒWe need to In the past few years Spain’s political and made it a serious presence in the EU. work out what we want to say and not just leaders have chosen to look backwards Mr Aznar, sensing that Europe’s centre of demand the right to speak, says Mr Pérez and to emphasise the local issues that di• gravity was moving east, tried to establish Díaz, the Madrid sociologist. vide them. Recession will create new and a special relationship with the United di erent political demands. Spain will no States. That had a certain logic, even if he Defending the idea of Spain longer be able to look to Europe for further failed to persuade Spaniards of it. It has That requires a clearer sense of what Spain windfalls. The euro has brought bene†ts been harder to divine the international is and what it stands for. In some ways, lo• but also a loss of competitiveness. For the ambitions of Mr Zapatero, who apart from calism is one of its strengths: for example, †rst time since Ortega coined his analysis, Spanish only speaks a little French and has the attachment of Spaniards to the folklore Europe is not an automatic‹and relatively never spent much time outside Spain. He and festivals of their home towns is an at• painless‹solution to Spain’s problems. A has said that he will give greater weight to tractive part of their culture. But exaggerat• return to rapid growth and high employ• foreign policy in his second term. He ar• ed localism is becoming a weakness. In the ment demands an economy that is even gues that Spain is uniquely well•placed to past teachers and other public servants more outward•looking, and a national promote Œnorth•south dialogue. His main would move around the country. Now government capable of pushing through initiative has been to call for an Œalliance of they stay in their own region. Some com• unpleasant reforms. That in turn requires civilisations, but few countries have paid panies †nd it diˆcult to recruit managers the politicians to defend the idea of Spain more than lip•service to this. who are prepared to work abroad. more e ectively even as they give due rec• Perhaps his one concrete achievement Reversing the drift to localism requires ognition to their country’s regional diver• in foreign policy has been in Africa. His changing the terms of the political debate. sity. After all, over the past 30 years few government has o ered aid to several It would help to take another look at the other places have been as successful. 7 north•west African countries if they will take back illegal immigrants deported O er to readers Future special reports from Spain. Some 80% of illegal migrants Reprints of this special report are available at a Countries and regions detained in Spain are now returned to price of £3.50 plus postage and packing. Russia November 29th their country of origin. A minimum order of †ve copies is required. India December 13th Mr Zapatero has raised spending on for• Corporate o er eign aid from 0.25% of GDP in 2004 to 0.5% Business, †nance, economics and ideas Customisation options on corporate orders of 100 Cars in the developing world November 15th this year, so his e orts in Africa have not or more are available. Please contact us to discuss The sea January 3rd 2009 come at the expense of Latin America your requirements. The future of †nance Jan 31st 2009 (where Spain spends ¤1.5 billion a year). Growth in emerging markets February 14th 2009 Send all orders to: Both the United States and the rest of Eu• rope like to talk regularly to Spain about The Rights and Syndication Department Latin America, says Trinidad Jiménez, who 26 Red Lion Square WC1R 4HQ is in charge of relations with the region. London Tel +44 (0)20 7576 8148 Generations of Spaniards believed Fax +44 (0)20 7576 8492 with José Ortega y Gasset, an early•20th• e•mail: [email protected] century philosopher, that ŒSpain is the pro• blem, Europe is the solution. Having done For more information and to order special reports Previous special reports and a list of so well out of the EU, Spain has uncritical• and reprints online, please visit our website forthcoming ones can be found online ly supported almost anything coming out www.economist.com/rights www.economist.com/specialreports of Brussels. But from 2013 it will become a